Feds’ insider trading wiretap snares IBM heir apparent

Hedge fund chatter fingers Big Blue man

The heir apparent to IBM CEO Sam Palmisano has been arrested and charged with insider trading, as US authorities cracked down on an alleged $20m scheme involving shares in some of the IT industry’s biggest names.

The case — which the FBI calls the largest hedge-fund insider trading case in US history — has also seen the arrest of an employee at Intel, the world’s largest chip maker.

Today, the Federal Bureau of Investigation and the US Attorney’s office in Manhattan filed insider trading charges against six people, including Robert Moffat, senior vice president and general manager of IBM’s Systems and Technology Group, and Rajiv Goel, director of strategic investments in Intel’s treasury department. Moffat had climbed the IBM ladder to the point where he was a prime candidate to succeed Palmisano as CEO.

Court papers say that inside information, including tips from IBM’s Moffat and Intel’s Goel, allowed a hedge fund and two private equity firms to unfairly pocket $20m. One complaint alleges schemes involving shares of Clearwire, Akamai Technologies, PeopleSupport, and Google, while a second complaint alleges similar insider trading in shares of Intel-competitor Advanced Micro Devices, Sun Microsystems, and IBM.

Kerry Lawrence, a lawyer representing IBM’s Moffat, has told the AP: “He’s shocked by the charges.” IBM declined to comment to The Reg.

Intel confirms with The Reg that Goel is an employee of Intel. Contrary to other press reports, Goel does not work for Intel Capital, the chip maker’s investment arm. Intel tells us that Goel has been placed on leave as the company “looks into the matter”. Company spokesman Chuck Mulloy says Intel was not aware of the insider trading case before charges were brought down on Goel.

In a statement released today, Preet Bharara, US Attorney for the Southern District of New York, and Joseph Demarest, assistant director-in-charge of the New York Office of the FBI, said that this was not only the largest hedge-fund insider trading case in US history, but that it was the first time court-authorized wiretaps were used to root out insider trading on Wall Street.

Typically, courts authorize wiretaps only after all other means of collecting evidence have been exhausted.

Both complaints involve billionaire Raj Rajaratnam, the founder and managing director of Galleon Management, a $7bn New York hedge fund. Rajaratnam, 52, of New York City, was ranked number 559 on Forbes magazine’s most recent list of the world’s wealthiest billionaires, with a net worth of $1.3 billion.

In the first court complaint — which we have uploaded here (PDF) — Rajiv Goel, of Intel, and Anil Kumar, a director at management consultancy McKinsey & Co, are named as Rajaratnam co-conspirators in an insider trading scheme that involved longing and shorting stocks between March and October 2008.

The complaint lists thirteen insider trades, including two Clearwire trades that involved Intel’s Goel and three AMD trades that involved McKinsey’s Kumar. At Intel, the complaint says, Goel, 51, of Los Altos, California, was privy to information about wireless outfit Clearwire, where the chip giant has invested over $1bn. Kumar, 51, of Santa Clara, California, the complaint says, did work for the spin-off of AMD's foundries.

The suit also alleges that Rajratnam and a confidential government witness engaged in insider trading relating to Google, Polycom, and Hilton Hotels that netted Galleon $12.7m. In exchange for the data Rajratnum received from the confidential witness, Rajratnam passed information on other technology companies. The complaint goes on to say he executed trades on behalf of Intel's Goel via a private Charles Schwab account.

In both the first complaint and the second — which you can see here (PDF) — AMD's foundries spin-off plays a prominent role. In February, AMD spun-off its chip-making business, creating a new company owned by the Abu Dhabi-backed Advanced Technology Investment Company. ATIC also partners with IBM in developing up chip-making technologies.

According to court papers, both McKinsey’s Kumar and IBM’s Moffat shared insider information involving the AMD spin-off, now called GlobalFoundries. Kumar passed information to Rajratnam, the papers say, and Moffat discussed secrets with Danielle Chiesi, an employee at New Castle Funds, formerly the equity hedge fund group of Bear Stearns. Rajratnum was also in touch with Chiesi, the papers say, even though they worked for different funds. According to the complaints, both were involved in insider trades.

As of Friday afternoon, Danielle Chiesi, 43, of New York City, was the fourth most popular search on Google, one slot higher than IBM’s Bob Moffat (though two steps below Raj Rajaratnam). Moffat, 53, of Ridgefield, Connecticut, is accused of giving Chiesi private information about the AMD spin-off, IBM’s quarterly earnings, and Sun Microsystems’ quarterly earnings during the time when Big Blue was working to acquire Sun.

Wiretap transcripts in the complaints include discussions between Chiesi and Rajaratnam. “I don't want anybody else to make money on this but us, ’cuz I don't want to get into trouble for a lot of reasons,” Chiesi allegedly said to Rajaratnam after obtaining information from Moffat. “If it leaks, I think I’m out of business… Because… who knows IBM? And who, who’s in bed with AMD? Put Danielle’s name on the fuckin’ ticket.”

The complaint goes on to detail additional discussions between Chiesi and Rajaratnam in which the two wondered whether Moffat might move to a different technology company. “Put him in some company where we can trade well,” Rajaratnam allegedly said.

According to court papers, Chiesi replied: “I know, I know. I’m thinking that, too. Or just keep him at IBM, you know, because this guy is giving me more information.… I’d like to keep him at IBM right now because that’s a very powerful place for him. For us, too.”

The court papers then have Rajaratnam saying “Only if he becomes CEO,” before Chiesi replies: “Well, not really. I mean, come on… you know, we nailed it.”

Chiesi, Rajaratnam, and Moffat were charged with three counts of conspiracy. Chiesi and Rajaratnam were also charged with three counts of securities fraud. Additionally, Chiesi was charged with one count for selling Akamai short and two for buying AMD stock ahead of the foundries spin-off.

Moffat, Chiesi, and Mark Kurland, another executive at New Castle, were also charged with insider trading based on data Moffat was passing on to Chiesi concerning IBM’s revenues and profits ahead of when the numbers went public in late 2008 and early 2009. According to court papers, insider trading in Sun shares based on information from Moffat was done in early 2009, after IBM had begun its negotiations with Sun to acquire it and before those negotiations became public. ®